Friday, May 6, 2016

It's like Deja Vu....all over again....

Alibaba released it's quarterly and year end financial statements today and of course, as expected, they were astounding.

Here are the links:

Press Release
http://www.alibabagroup.com/en/news/press_pdf/p160505.pdf

6K Filing
http://www.sec.gov/Archives/edgar/data/1577552/000110465916118194/a16-10677_1ex99d1.htm

Conference Call & Presentation -
http://www.alibabagroup.com/en/ir/earnings

Presentation
http://www.alibabagroup.com/en/ir/presentations/pre160505.pdf

If you'd like to re-live the Alibaba journey, feel free to track their financial progress in my prior posts listed in chronological order by Investor Call:

9/30/14 Q2 - My Posts Re: Alibaba on Laura Logan's CBS News Page....Enjoy!
12/31/14 Q3 - Once upon a time...
3/31/15 Year End - Alibaba....a year in review
6/30/15 Q1 - Alibaba....the odyssey continues...
9/30/15/ Q2 - One of these things is not like the others...
12/31/15 Q3 - Oh what a tangled web we weave....

They've also just posted a really nice video clip showing us what a wonderful company they are building.  For a change of pace, I've attached an Ernst & Young training video discussing how Ernst & Young personnel got caught up in the WorldCom fraud. It's kind of dry....like most CPA training videos are known to be, but it's relevant here and illustrates how something like this can happen.  It's always heartbreaking when wonderful, well meaning people, who just want to make their boss happy and collect a nice paycheck, end up in jail.

You can follow along with the history and get more detailed discussion of the development of this saga from my prior posts, but here are the bullet points of today's wonderfully entertaining conference call, press release and filing:

GMV!...It's Everywhere!

GMV - RMB742 Billion (US$115 Billion) for the quarter and growing at  24% YOY.....Revenue growing at 39% YOY.  Earnings through the roof at 22% of revenue (US$824 Million), growing at 85% YOY.  This is incredible!  Oddly, no other large eCommerce business in China (JD.com, VipShop, 58.com) is showing anything close to earnings metrics on this scale. Here are the March 31st, 2016 Quarter, YOY growth metrics (Analyst Revenue & Earnings estimates per Yahoo! Finance) for other relevant ADRs in China. Actual numbers will be available next few weeks and I'll update the schedule as time permits.



The point of the above schedule is, for Internet and eCommerce businesses in China, it's the Wild West out there.  Gigantic revenue increases, dramatic fluctuations in income and expenses with meager earnings, combined with acquisitions, financing rounds and deals du jour.  Their accounting and finance departments must be a whirlwind of activity trying to accurately report and value this unfettered entrepreneurial spirit, all with the expectation that these businesses are investing for the future, spending huge amounts of money and anticipating that the sky is their only eventual limit.  Note that these businesses are also occasionally rumored to be puffing up their financial performance using Alibaba-like accounting gimmicks as well, but from what I can see, none of them can hold a candle to Alibaba's tom-foolery.  Remember, like your mother always said, it's all fun and games until somebody gets hurt.

Compare the eCommerce figures to the relatively consistent revenue and earnings streams of the two telecom ADRs.  (China Mobile and China Telecom)  5% +/- consistent growth rates with managed, predictable earnings.  According to Alibaba, everyone in China is is banging away on their smart phones buying "stuff" on-line yet the telecoms aren't seeing any appreciable usage/revenue increases.

Hmmmmm....that's odd.

Moreover, Apple just announced that it saw a "26% decline in Greater China Revenue".  It's also odd that a brand like Apple is unable to make any headway in China when, according to Alibaba's metrics, more than 70% of their business is done on a mobile platform now.  Smart phones have become an integral part of the eCommerce growth story and they should be flying off the shelves.  Maybe all of the Apple knock-offs on Taobao and Tmall (These vendors don't look like authorized Apple distributors to me!)  have something to do with the Apple shortfall?....who knows?

China's NBS data reflects a similar disparity.  The Annual growth rate (YOY) for Retail Sales of All Physical Consumer Goods is only 8.5%.  As we've already discussed, based on my prior "Anonymous" post, Alibaba has established that its GMV is actually more than the entire retail sales of all relevant retail categories in China.   Per the NBS, the online retail sales of physical goods, in all of China, was 824.1billion RMB for the quarter ended March 31st 2016, increasing 25.9 percent from the same period last year.

Interestingly, if we add the the March Quarter GMV together for just three of the businesses above, we get the following:


As you can see, the GMV reported by these three businesses alone exceeds the National Bureau of Statistics (NBS) figure for all of China by roughly RMB350 Billion, or US$53 Billion.

Either the NBS data is incorrect, or we've run into the phenomenon I had discussed in my "Anonymous" post, that all of the other eCommerce businesses in China must be selling "anti-matter" in order to get these figures back down to the the aggregate level reported by the NBS.   Of course, this is simply not possible.

Moreover, the NBS isn't exactly known as a bastion of conservative reporting when it comes to proselytizing the China Dream, there's a good chance the NBS numbers are actually overstated as well.  Not withstanding, even the NBS politically motivated reporting methods can't produce growth rates anything near Alibaba's.

Value From Thin Air...

"Questionable Assets" (Goodwill, Intangibles, Investment "Securities" and Investments in "Investees"  etc.) grew during the quarter, recording a write up of US$471 Million (about half of Net Income) on "Gain on deemed disposals/disposals/ revaluation of investments and others" reported on page 28 of the press release.  Apparently this is managements way of disclosing that "we wrote up the value of a bunch of money losing dog-shit businesses we own to window-dress our financial statements".  The total increase comes in at a whopping US$22.4 Billion since June 30th, 2014, the last quarter prior to the IPO.  Dozens of "acquisitions/partnerships/joint-ventures" and "deals" are reported by the financial press and in the company's own press releases, yet again, there is no detail, discussion or any reference as to the operating metrics of any of these businesses....Just big, fat unidentified write-ups.

Losers

In the interest of full disclosure, management was forthright enough to provide a schedule of their money losing acquisitions.  They've incurred losses of US$397 Million on Koubei, Youku Tudou, Cainiao Network and others. (Page 18) This was partially offset by another US$129 Million of dilution gains (asset write-ups) for Evergrande FC (the soccer club Jack bought one night in a drunken stupor) and Cainiao, their fake logistics/distribution "ecosystem".  My understanding is that "ecosystem" is eCommerce code for other people doing all the work.

Since Alibaba actually disclosed the profitability (or lack thereof) of these businesses, like so many of their other metrics, can we assume that these losers are the cream of the crop?  Food for thought.

Interestingly, there was another schedule in the presentation that wasn't included in the Press Release or 6k



The gist of the schedule indicates that they've got plenty of value in these investments (Even though by their cryptic disclosures all of the above are currently unprofitable.)  Here's a humorous footnote from the above schedule:

(3) Ant Financial valuation based on reported valuation of USD 60 billion in media; Alibaba Group receives 37.5% of Ant’s pre-tax income now, and if regulations allow, Alibaba Group is entitled to acquire up to a 33% equity interests in Ant Financial. For conservative purpose, 33% is used in calculating Alibaba Group’s economics in Ant Financial here.   

So now we are basing a US$60 Billion asset valuation on a Bloomberg media report?.....Really?  Don't get me wrong, I love the media, I just don't think a news outlet should be valuing businesses.

Now, here's the same schedule from the June 30th, 2015 Presentation.  Keep in mind that these valuations were prior to the July 2015 market crash.


Here's the line by line comparison:


So, in only 9 months, $15.8 Billion in value was created out of thin air.  Most of the value was again, assigned based on an Ant Financial "media valuation" and a step up valuation in Cainiao Network because of a minority share purchase/financing round.  To be clear, only the pro-rata ownership values if at all accurate, would inure to Alibaba, but they are responsible for the accuracy of these valuations since they are making these representations..  Again, I find it odd that this schedule, (like the June schedule) was not included in the 6K......Hmmmmm.

To repeat myself, all of this value was "created" after the 40% market crash in July, and for the most part have yet to recover.  Here are a few more points to ponder:
  • Cainaio Networks lost $46 Million last year.  Nine months ago it had no value (per the schedules) Now it's worth $6.2 Billion,
  • Do any of these businesses have earnings?  My understanding is that they don't.  But it would be nice for management to discuss it.
  • Presumably, Youku Tudou was absorbed and now consolidated in the Alibaba financials.  We have no idea what the impact of this business is on the consolidation.  Presumably it's either just a part of the giant blob of "China Commerce Marketplace" or part of "Other Revenue".  Again, we have no way of knowing.
The other shocking disclosure, at least to me, wast that Ant Financial is not profitable.  Nowhere in the Press Release, 6k or the conference call do they report the exact loss incurred by Ant Financial.  It is apparently one of the reasons "Other Income" declined during the quarter along with Forex Conversion losses and other obfuscatory silliness.  Here's the statement from page 11 of the press release:

Other income or loss, net – In the quarter ended March 31, 2016, we booked other loss, net of RMB529 million (US$82 million), compared to other income, net of RMB496 million in the same quarter of 2015. The loss was incurred primarily because of foreign exchange losses related to U.S. dollar obligations in connection with our M&A activities and net loss sustained by Ant Financial during the quarter as a result of its marketing and promotion activities to drive user growth and engagement, especially during the Chinese New Year holiday. Ant Financial’s net loss in the quarter, in turn, resulted in our reversal of income recognized in respect of royalty fees and software technology services fees from Ant Financial under our profit sharing arrangement. The reversal of income amounted to a charge of RMB207 million (US$32 million) in the quarter ended March 31, 2016, compared to income of RMB266 million recognized in the same quarter of 2015 and income of RMB502 million in the prior quarter. Despite a quarterly loss at Ant Financial, we believe we will derive long-term value from our economic interest (and our right, subject to regulatory approval, to convert into 33% equity) in Ant Financial, which recently completed a US$4.5 billion round of financing from third parties at a post-money valuation around US$60 billion.

Does anyone even know what that paragraph even means?  Why are they discussing the possible equity conversion, and the financing round and valuation here?

So, Ant Financial, their US$60 Billion baby, lost money because of additional marketing and promotion costs on Chinese New Year sales?  Really?  According to the filings Alipay has 900 Million Registered Accounts.   Who are they marketing to?  They ARE the entire market.  They have no competition.  They shouldn't have to spend a nickle on marketing and promotion. This business should be an annuity....it should be printing money!  How could they possibly incur a loss just because they peed away some money on advertising during Chinese New Year??

My guess is that there were actually some "off the books" expenses that absolutely had to be taken care of. Perhaps some money found it's way to a few of the Caribbean Shell Corps?  Maybe a few government officials needed to get some crates of cash to Panama?  Just label the boxes "kitchen utensils". Unfortunately, we may never know what happened for sure.  But as JoeTsai begged us in his opening remarks, we need to be patient.

Taking Care of your Friends....

Speaking of crates of cash, Share Based Compensation remains at incredible levels;  19% of Revenue for the quarter and  16% for the year.  Alibaba has about 36,000 employees.  To my knowledge, there is no other business on the planet that has ever issued US$2.5 Billion in share based Comp in the last year.

The schedule on pg. 16 of the press release describing the share/comp distribution is as odd as anything else in the filing.  Roughly a third of the shares go to employees of Ant Financial.  Do employees of Alibaba get shares of Ant? Perhaps this construct is common in China, I've been told it is, but the idea of giving shares away to employees of another related company baffles me.  It would be like Jeff Immelt deciding to give GE shares to Jamie Dimon and a few JPM employees because they did a nice job on some M&A.  Again, call me old school, but I just don't get it.

Flying Blind.....

Lack of Transparency:  Again, there is no breakdown of the various business units or 300+/- separate businesses, shell companies, partnerships, joint ventures and contractual arrangements consolidated/rolled-up into this VIE.  Management continues to harp that they don't manage their business units independently and don't manage to a gross margin.  From my perspective, I really can't tell what, if any, metrics they actually manage to.  Things just seem to happen.  For the year, Alibaba reported one giant blob of revenue entitled "China Commerce Retail Marketplace".  This giant blob contained 76% of total reported revenue, yet a significant portion of the call was spent discussing Cloud Computing and mobile "stuff".  I also have to say that if I hear Daniel Zhang give another talk about coat sales and the related cold/warm weather in China (minute 44:00 of the Investor Call) when asked about product mix, I'm going to puke all over my lap-top.  In the words of my slightly more abrupt money manager friend:

"I don't want to hear about the weather in China....I just want to know how many billions of  %#&#!! coats, TVs, appliances and phones they sell...."

Summary....Ugggghhhh

Now it's just a matter of time before this mess implodes taking the China eCommerce ADR dream, and a good chunk of the US Capital markets with it.  As I write this, BABA is up $3.00/share, proving to me that there is a surplus of "dumb money" in America and/or a number of the money managers, entrusted to handle our hard earned savings, simply don't do any analysis or real work. Any third year auditing student could see that the Alibaba books are cooked.   The probability of these financial statements being accurate and truly reflective of Alibaba's financial condition is rapidly approaching zero.  It's a pretty disturbing development for the "Greatest IPO in History".  Perhaps if all of those Investment Bankers, Accountants and Lawyers just would have watched that E&Y training video, none of this ever would have happened.  As David Meyers said in the video  (minute 11:50 of the clip) "I'd never seen an accountant go to jail...."

Remember the rules:  First insider contacting the SEC stays out of the Gray Bar Hotel..

Ready....Set.....Go....

You just can't make this stuff up......




More reading:

Presumed Fake/knock-off -  iPhones on Tmall
https://list.tmall.com/search_product.htm?q=iphone&type=p&vmarket=&spm=875.7931836.a2227oh.d100&from=mallfp..pc_1_searchbutton

Presumed Fake/knock-off -  iPhones on Taobao
https://world.taobao.com/search/search.htm?_ksTS=1462483949759_20&spm=a21bp.7806943.20151106.1&_input_charset=utf-8&navigator=all&json=on&q=iPhone&callback=__jsonp_cb&abtest=_AB-LR517-LR854-LR895-PR517-PR854-PV895_2461

Evergrande FC - Drunken Sailor
http://www.bloomberg.com/news/articles/2014-06-05/evergrande-rises-on-alibaba-soccer-stake-report-hong-kong-mover

 NBS Data
http://www.stats.gov.cn/english/PressRelease/201604/t20160418_1345156.html

http://www.stats.gov.cn/english/PressRelease/201604/t20160418_1345135.html

China Mobile - 4.9% YOY Revenue Increase in March 31, 2016 Quarter.
http://www.sec.gov/Archives/edgar/data/1117795/000119312516549028/d180736d6k.htm


4 comments:

  1. Hey,

    I have few questions:

    1. Are you short on Alibaba at the moment?
    2. In your opinion, what would be the trigger\hint for their crush?

    Is there a way to contact you? I don't mind who you are as much as I would like to talk to you.

    Thank you

    ReplyDelete
  2. Thanks Tom, first, I'm not short Alibaba, although my analysis has prompted an adjustment in our household investments. When the hottest IPO in history is a mess, there will undoubtedly be some negative ramifications. (i.e. perp-walks, finger pointing and the obligatory, yet albeit routine, Congressional "what did you know and when did you know it?" hearings.)

    The trigger, like all of these schemes, will be when they run out of cash. In big rough numbers, per my sometimes flawed memory, they've gone through the IPO Money $13B, the Bond issue $8B, Credit Facility $3B and now the Ant Financial placement $4.5B (a business that should be printing money yet manages to operate at a loss) all in a year and a half ....as Jim Chanos and Anne Stevenson-Yang correctly point out, there's a good chance there is actually negative cash flow in this un-auditable spaghetti bowl of related entities, contracts, joint ventures and financial arrangements.

    The other trigger should be an SEC investigation. If Mary Jo White has any political savvy at all, she will be announcing a public inquiry soon. I'm really surprised it's taken this long. If she's learned anything from the Madoff Ponzi, she should be getting out in front of this, rather than looking like the last one on the planet to figure it out.

    I look at my blog as a kind of public service for underprivileged, naive investors who just think throwing money blindly into an index fund and hoping for the best is a good strategy.

    Contact me directly Deep.Throat.IPO@gmail.com and we can exchange phone numbers.

    DT

    ReplyDelete
  3. Hi Tom. I am from Hong Kong. Your insights on the following:
    1. SEC is looking at the details of its accounting for a delivery affiliate, its operating data for the largest online shopping day of the year, and “related party transactions in general.” Why these three? Have that answered the issues that you have been writing about.
    2. You have suggested an SEC investigtion as the trigger. Is this the one? The US media didn't seem to see that as a big deal.
    3. Forgive my ignorance of the US regulatory system. Where is this likely to lead to? Are we expecting a long back and forth between SEC and alibaba?

    ReplyDelete
    Replies
    1. Thanks for the good question...Sorry for the delay in reply....been busy.....I'm going to cover your question....along with a few others in my next post. Stay tuned.....

      Delete